Site Mobile Navigation

Spitzer Fall Began With Bank Reports

Last July, the North Fork Bank raised a red flag about suspicious financial transactions involving Gov. Eliot Spitzer. But for several months, the electronic report languished unnoticed in a vast Treasury Department database in Detroit.

In early fall, however, a separate report was filed by the HSBC bank about suspicious transactions connected to two shell companies, which drew the attention of investigators. That touched off an inquiry that led investigators to discover the July report on Mr. Spitzer, which showed he had made several wire transfers to those companies, according to three people briefed on the inquiry.

When HSBC employees investigated the two companies, QAT International and QAT Consulting Group, they discovered that the bank’s files for the companies included virtually no information, one of the people briefed said.

“The bank found that the due diligence was not done — there was no Dun & Bradstreet, no documentation, almost nothing in the file,” the person said. “They probably got scared and said, ‘Uh oh, one of our bankers didn’t follow our protocol.’ ”

Following the bank’s alert, agents for the Internal Revenue Service in Hauppauge, on Long Island, began examining the shell companies, which are allegedly connected to a Web-based prostitution service named Emperor’s Club V.I.P. At that time, the agents had no idea how the QAT front companies had collected hundreds of thousands of dollars in revenue.

“They still didn’t know what the business was, and they started digging into the account — is it drugs, money laundering?” said one of the people briefed on the inquiry. “They then start to see money from Spitzer.”

These accounts of the origins of the investigation offer a more detailed chronology of the events that led to the wiretapped conversations of “Client 9” arranging to meet a prostitute at the Mayflower Hotel in Washington, and ultimately to Mr. Spitzer’s resignation on Wednesday.

One of Mr. Spitzer’s lawyers, Michele Hirshman, who served as his deputy when he was New York’s attorney general, spent several hours at the United States attorney’s office in Lower Manhattan on Tuesday learning about the evidence gathered about Mr. Spitzer.

A person briefed on the meeting said Wednesday that prosecutors had told Ms. Hirshman “there was a lot of evidence against him.” The person said people involved in the investigation “seemed very confident he was going to resign” in a conversation Monday night. “He really didn’t have a choice.” Ms. Hirshman did not respond to phone and e-mail messages Wednesday.

Michael J. Garcia, the chief federal prosecutor in New York, said in a statement Wednesday: "There is no agreement between this office and Gov. Eliot Spitzer relating to his resignation or any other matter."

Mr. Spitzer’s suspicious financial transactions at North Fork might never have been discovered were it not for a Suspicious Activity Report filed by HSBC about the shell companies linked to Emperor’s Club V.I.P. in October, according to several people with knowledge of the inquiry, who spoke about the investigation on condition of anonymity.

As it turned out, both the North Fork Bank and HSBC had faced inquiries into their lending practices led by Mr. Spitzer when he was New York attorney general. In the case of North Fork, Mr. Spitzer announced a settlement in 2003 requiring it to refund more than $20,000 to dozens of homeowners and cease what he said was its practice of charging homeowners illegal fees.

Experts who advise banks and individuals on anti-money laundering regulations, said that the two banks were just following the law when they reported the suspicious financial transactions to federal authorities.

These officials said that banks are likely to more closely monitor the transactions of politicians like Mr. Spitzer than those of average customers. In part, that is because of legislation passed after the 2001 terrorist attacks.

As part of the “know your customer” requirements, banks must assess their clients’ financial patterns and set guidelines to ensure that an alarm is sounded if there are unusual transactions, said Bob Serino, a former deputy chief counsel at the Office of the Comptroller of the Currency who now advises banks and individuals on anti-money laundering regulations.

“The idea is that if somehow a customer who usually deposits $3,000 a week starts depositing $300,000 into his account daily, that would be kicked out and looked at,” Mr. Serino said. “Banks could certainly decide that a politician’s risk rate is higher and thus have a higher level of due diligence set for someone like Spitzer.”

In addition, banks must exercise an extra level of due diligence for a “politically exposed person.” While the law defines such people as “current or former foreign political figures, their immediate family and their close associates,” several banking officials at major institutions said that as a matter of practice, they extend extra scrutiny to American political figures.

The July Suspicious Activity Report by North Fork that flagged Mr. Spitzer’s transactions picked up three wire transfers totaling roughly $10,000 to QAT International, in what appeared to the bank as a possible attempt to avoid a separate legal requirement that banks notify the Treasury Department of transactions of $10,000 or more, officials involved with the case have said.

The requirement to report such large transactions applies only to currency transactions — “the coin and paper money of the United States” — not to wire transactions of the sort that Mr. Spitzer allegedly made, Mr. Serino said.

Once a bank determines that a transaction is suspicious, it is obligated to file a Suspicious Activity Report with FinCEN, the Financial Crimes Enforcement Network, a division of the Treasury Department. The standard for filing such reports has diminished since 9/11, with banks erring on the side of caution out of fear that the government will later second-guess its decisions, experts said.

The Suspicious Activity Report filed by Mr. Spitzer’s bank was one of hundreds of thousands filed annually, and three people with knowledge of the investigation said it did not immediately attract the attention of federal investigators. But when HSBC filed its report on the shell companies, the I.R.S. began an inquiry.

A former director of FinCEN, who now works in the industry at a company whose policies prohibit speaking on the record, said that since 9/11, suspicious activity reports had increasingly been used as a source of tips for law enforcement.

“What 9/11 taught us is the value of financial information,” the former director said. “Money doesn’t lie. Money leaves a footprint. And that’s exactly what happened with Spitzer.”

A version of this article appears in print on , on page A20 of the New York edition with the headline: Bank Reports, Then Wiretapping, Led to Unraveling of Ring and Its Client 9. Order Reprints|Today's Paper|Subscribe